Jeremy Whittaker Research, software, markets, and Arizona systems
Article August 12, 2024 4 min read

Unconventional Success: A Fundamental Approach to Personal Investment by David F. Swensen 

I’ve had Unconventional Success by David F. Swensen on my shelf for five years, but it took me a while to finish. The book is somewhat dense and challenging, yet it offers valuable insights, particularly about the effects of drawdown on a portfolio. Swensen, Yale’s CIO for 36 years, managed to achieve an impressive 12% annual return during his tenure.

One key takeaway is that while the S&P 500 generally outperforms many strategies, certain portfolios can do better overall by minimizing drawdowns. Swensen emphasizes several principles that are common in investment literature:

  1. Equities Should Dominate: Despite being riskier, equities offer higher long-term returns.
  2. Passive Investing Over Active Management: Costs significantly impact your portfolio, so minimize them.
  3. Diversification Is Essential: A portfolio solely composed of equities will suffer from severe drawdowns, which can take years to recover from. A well-balanced portfolio mitigates this risk.
  4. Avoid Market Timing: Base your strategy on long-term thinking.
  5. Rebalancing Is Crucial: Regularly sell overperforming assets and buy underperforming ones.
  6. Consider Tax Implications: Be aware of the tax consequences when buying or selling assets.
  7. Stay Disciplined: Don’t let emotions dictate your investment decisions.

Swensen’s Model Portfolio

Swensen’s recommended allocation includes:

  • U.S. Equities: 30%
  • International Developed Market Equities: 15%
  • Emerging Market Equities: 5%
  • REITs: 20%
  • U.S. Treasury Bonds: 15%
  • TIPS: 15%

Hypothetical Portfolios

I compiled and backtested several hypothetical portfolios based on Swensen’s principles. While most failed to outperform the S&P 500 over a 20-year period, one aggressive portfolio did manage to do so, primarily due to its better handling of drawdowns during the 2008-2009 recession.

Conservative Portfolio: $45,293Conservative B Portfolio: $38,916
Moderate Portfolio: $54,785Moderate B Portfolio: $60,839
Aggressive Portfolio: $64,137Aggressive B Portfolio: $93,856
S&P 500 (SPY): $80,315

Portfolio Allocations

Original Portfolios

  1. Conservative Portfolio:
    • 25% VTI, 10% EFA, 5% VWO, 15% VNQ, 25% IEF, 20% TIP
  2. Moderate Portfolio:
    • 30% VTI, 15% EFA, 10% VWO, 15% VNQ, 15% IEF, 15% TIP
  3. Aggressive Portfolio:
    • 40% VTI, 20% EFA, 15% VWO, 10% VNQ, 10% IEF, 5% TIP

B-Series Portfolios

  1. Conservative B Portfolio:
    • 20% VTSAX, 10% VEA, 5% VWO, 15% VNQ, 25% VBTLX, 25% VIPSX
  2. Moderate B Portfolio:
    • 25% VTSAX, 15% VEA, 10% VWO, 20% VNQ, 15% VBTLX, 15% VIPSX
  3. Aggressive B Portfolio:
    • 35% VTSAX, 20% VEA, 10% VWO, 20% VNQ, 10% VBTLX, 5% VIPSX

Benchmark

  1. S&P 500 (SPY)

While beating the S&P 500 over the long term is challenging, Swensen’s strategies offer a solid foundation for those looking to manage risk and optimize returns. For most investors, simply investing in the S&P 500 might be the best approach, but Swensen shows there are ways to potentially outperform through strategic portfolio management.

Annual Returns (2003 – 2023)

2003

PortfolioReturn
Conservative Portfolio18.34%
Moderate Portfolio19.90%
Aggressive Portfolio21.45%
Conservative B13.39%
Moderate B18.30%
Aggressive B23.95%
S&P 500 (SPY)28.18%

2004

PortfolioReturn
Conservative Portfolio11.55%
Moderate Portfolio12.49%
Aggressive Portfolio14.08%
Conservative B7.42%
Moderate B19.80%
Aggressive B21.28%
S&P 500 (SPY)10.70%

2005

PortfolioReturn
Conservative Portfolio8.62%
Moderate Portfolio10.46%
Aggressive Portfolio12.24%
Conservative B7.57%
Moderate B10.68%
Aggressive B11.77%
S&P 500 (SPY)4.83%

2006

PortfolioReturn
Conservative Portfolio18.71%
Moderate Portfolio21.07%
Aggressive Portfolio23.19%
Conservative B19.47%
Moderate B22.66%
Aggressive B26.71%
S&P 500 (SPY)15.85%

2007

PortfolioReturn
Conservative Portfolio6.92%
Moderate Portfolio7.64%
Aggressive Portfolio9.07%
Conservative B5.04%
Moderate B6.09%
Aggressive B7.82%
S&P 500 (SPY)5.14%

2008

PortfolioReturn
Conservative Portfolio-24.53%
Moderate Portfolio-27.55%
Aggressive Portfolio-31.46%
Conservative B-24.30%
Moderate B-27.57%
Aggressive B-33.20%
S&P 500 (SPY)-36.81%

2009

PortfolioReturn
Conservative Portfolio22.78%
Moderate Portfolio25.46%
Aggressive Portfolio27.59%
Conservative B26.79%
Moderate B33.32%
Aggressive B39.89%
S&P 500 (SPY)26.37%

2010

PortfolioReturn
Conservative Portfolio14.65%
Moderate Portfolio15.73%
Aggressive Portfolio16.57%
Conservative B12.81%
Moderate B18.72%
Aggressive B23.66%
S&P 500 (SPY)15.06%

2011

PortfolioReturn
Conservative Portfolio5.33%
Moderate Portfolio3.66%
Aggressive Portfolio3.92%
Conservative B3.07%
Moderate B4.50%
Aggressive B0.33%
S&P 500 (SPY)1.89%

2012

PortfolioReturn
Conservative Portfolio14.20%
Moderate Portfolio14.95%
Aggressive Portfolio16.05%
Conservative B11.49%
Moderate B13.46%
Aggressive B19.45%
S&P 500 (SPY)15.99%

2013

PortfolioReturn
Conservative Portfolio10.62%
Moderate Portfolio14.34%
Aggressive Portfolio16.07%
Conservative B10.61%
Moderate B12.44%
Aggressive B22.27%
S&P 500 (SPY)32.31%

2014

PortfolioReturn
Conservative Portfolio8.49%
Moderate Portfolio10.03%
Aggressive Portfolio11.11%
Conservative B7.99%
Moderate B11.00%
Aggressive B13.04%
S&P 500 (SPY)13.46%

2015

PortfolioReturn
Conservative Portfolio-1.37%
Moderate Portfolio-2.23%
Aggressive Portfolio-3.02%
Conservative B-1.60%
Moderate B-1.42%
Aggressive B-2.27%
S&P 500 (SPY)1.25%

2016

PortfolioReturn
Conservative Portfolio7.71%
Moderate Portfolio9.56%
Aggressive Portfolio10.96%
Conservative B7.62%
Moderate B8.03%
Aggressive B12.17%
S&P 500 (SPY)12.00%

2017

PortfolioReturn
Conservative Portfolio13.75%
Moderate Portfolio18.11%
Aggressive Portfolio21.11%
Conservative B12.78%
Moderate B17.42%
Aggressive B24.71%
S&P 500 (SPY)21.70%

2018

PortfolioReturn
Conservative Portfolio-6.43%
Moderate Portfolio-8.74%
Aggressive Portfolio-11.04%
Conservative B-6.69%
Moderate B-7.04%
Aggressive B-10.27%
S&P 500 (SPY)-4.56%

2019

PortfolioReturn
Conservative Portfolio21.73%
Moderate Portfolio23.58%
Aggressive Portfolio26.23%
Conservative B19.53%
Moderate B21.70%
Aggressive B29.21%
S&P 500 (SPY)31.22%

2020

PortfolioReturn
Conservative Portfolio10.83%
Moderate Portfolio13.58%
Aggressive Portfolio15.56%
Conservative B10.56%
Moderate B11.04%
Aggressive B14.82%
S&P 500 (SPY)18.37%

2021

PortfolioReturn
Conservative Portfolio12.71%
Moderate Portfolio16.57%
Aggressive Portfolio20.73%
Conservative B14.87%
Moderate B17.24%
Aggressive B23.33%
S&P 500 (SPY)28.75%

2022

PortfolioReturn
Conservative Portfolio-17.25%
Moderate Portfolio-18.32%
Aggressive Portfolio-19.45%
Conservative B-17.07%
Moderate B-17.58%
Aggressive B-19.11%
S&P 500 (SPY)-18.17%

2023

PortfolioReturn
Conservative Portfolio14.22%
Moderate Portfolio15.87%
Aggressive Portfolio17.73%
Conservative B13.49%
Moderate B15.92%
Aggressive B17.73%
S&P 500 (SPY)26.19%

I also created a custom GPT for this book. You can find that here.

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